For every bond auction, the Reserve Bank asks for an underwriting commitment from primary dealers as they are the market makers in government securities. Primary dealers have to underwrite the bonds when an auction devolves due to low demand or unwillingness of the central bank to accept bids at certain yield levels.
On Thursday, the central bank had set a commission of 80 paise for every rupee of the 7.16%, 2023 bond that primary dealers were willing to underwrite. According to dealers, such a high level of underwriting fee has not been awarded since 2009.
Given the weak sentiment in the market, no one wants to take on more losses by buying these bonds, said a primary dealer.
Interestingly, even at such a high underwriting commission, primary dealers only agreed to under-write Rs 12,189 crore of the total Rs 15,000 crore on auction.
"The auction results indicate that the RBI is perhaps comfortable allocating bonds to investors at the current levels. Next week, we could see the yields settling 5-6 basis points higher," said Ajay Marwaha, head of trading at HDFC Bank.
The central bank's move to cap banks' borrowings from the repo tender at Rs 75,000 crore had sent bond yields surging over 50 basis points earlier this week. Short-term money market rates spiked with banks fearing tighter liquidity.
Although the results of the government bond auction brought some much-needed clarity to the market, bond traders are still split over the likely direction of yields in the coming days.
Public sector bank treasurers feel that yields will ease next week onwards and settle in near to 7.80-7.90% band. PSU bank treasurers also feel that the RBI's measures to stem the rupee's volatility are temporary and given that the currency seems to be less volatile, these measures can soon be unwound.
However, some bond traders in foreign and private banks hold the view that bond yields could rise again. "The market currently is in denial. Once it becomes apparent that these measures are not short-term or temporary, we could actually see some sell-off," said a bond trader at a private bank.